Saudi banks 'well positioned to ride euro crisis'

Paris, October 16, 2011

Saudi Arabia's central bank is not interested in buying distressed or speculative assets such as troubled European debt and gold and the Opec member's banks are well positioned to withstand the euro zone crisis, its head said.

The world's No. 1 oil exporter like most of its Gulf neighbours is a major holder of dollar assets as its riyal currency is pegged to the greenback and crude accounts for 85 percent of its budget revenue.

Saudi Arabian Monetary Agency Governor Muhammad Al-Jasser said banks in the world's top Arab economy were well positioned to deal with any upcoming shocks as well as the European debt crisis. Capital adequacy for banks was north of 17 percent with most of it Tier 1 capital.

'That's very robust. Second, our banks sources of funding are predominantly domestic from domestic deposits which is a reasonably stable source of funding,' he said, standing in front of the G20 meeting venue at a sprawling complex of Ministry of Economy, Finance and Industry.

'Most of the lending is domestic also so the exposure to the outside is very limited and therefore we are very confident that our banking system is well positioned to withstand any stress emanating from what's happening in Europe,' he said. Robust lending growth to the private sector of more than 9 percent in the first 10 months of the year indicated strong demand, while inflation has stabilised in a tight range of 4.6-4.9 percent and should begin trending down, Al-Jasser said.

'Our economy is doing very well and is expected to continue next year. This year, I have forecast that we will have at least 5 percent growth and probably something close to that next year,' he said.

Analysts polled by Reuters in September expected the $447 billion Saudi economy to expand by 6.5 percent this year and 4.5 percent in 2012 helped by an estimated $130 billion boost in social spending, or nearly 30 percent of GDP.

Asked if the Saudi Arabian Monetary Agency had considered buying European sovereign bonds such as Italian ones, Governor Muhammad Al-Jasser told Reuters: 'We do not buy specific bonds at all. We have not done it.'

'We always have a much more integrated reserve investment strategy which looks at it in a continuous and dynamic way that values security, safety and liquidity and therefore we do not look opportunistically at distressed assets or special assets that come up one way or the other,' Al-Jasser said after a meeting of the Group of 20 countries in Paris.

The central bank of Saudi Arabia, which is the only Middle Eastern member of the G20 group of developed and emerging economies, rarely comments on its reserve strategy.

Gold, which has tumbled from a record high of above $1,920 an ounce, is another asset of little interest to the Saudi central bank due to its volatility, Al-Jasser said.

'We have gold in our reserves but we have not bought and we have not sold it in a very long time. It has become a very speculative asset and we do not get into any speculative assets,' he said.

Asked whether the central bank was going to stick to this strategy, AL-Jasser said: 'Yes'.

Boosted by robust oil prices of above $100 per barrel this year, the Saudi central bank's net foreign asset reserves have climbed steadily to a record high of 1.879 trillion riyals ($500 billion) in August. Gold reserves have been unchanged at 1.556 billion riyals since 2008, the central bank's data show.

Al-Jasser also said US Treasuries continued to be 'an important safe haven and major asset' in global financial markets. '62 percent of global reserves are still in US assets. It is safe to say they are there to stay for a while,' he said.

A downgrade of the United States' top-notch 'AAA' credit rating by Standard & Poor's in August shocked the global markets but had no adverse impact on its bonds.

Al-Jasser said interest rates settings were appropriate at the moment with no signs of inflation coming from monetary impetus.

'I still think it is an appropriate setting now until we see inflation due to monetary impetus,' he said. Asked whether that meant credit growth needed to be in double digits, Al-Jasser said: 'Something like that. And it also depends on credit whether it is going to productive activities and leading to growth one would not worry too much about it, if it is going to finance speculative activities one has to worry.'

The Saudi central bank has been keeping its repo rate at 2 percent since January 2009 and reverse repo rate at 0.25 percent since June 2009. It needs to hold its key rates near US benchmarks to avoid excessive pressures on its dollar peg. -Reuters